Articles

El Nuevo Día Nov 26, 2024
EFRAÍN MONTALBÁN efrain.montalban@gfrmedia.com

Office of the Comptroller completes audit on the status of the public debt

Although laws were approved to borrow, the government and its public corporations issued dozens of bonds without sufficient revenue, which “was not the most correct thing,” says Yesmín Valdivieso

By 2015, Puerto Rico had committed 14.7% of its revenue to the General Fund, almost reaching the constitutional limit. In the photo, a view of the Constitution of Puerto Rico in the Rotunda of the Capitol.
An audit of the bond issuances sold by the government of Puerto Rico and public corporations concluded that such financial instruments were issued within the framework of the law and constitution of the island, published the Office of the Comptroller of Puerto Rico (OCPR).

However, despite the fact that borrowing was done under an approved law, the examination conducted by the OCPR revealed that the government and the public corporations issued bonds without having sufficient revenue to cover such obligations, worsening the island's fiscal situation.

The OCPR evaluated the approval process and the establishment of the repayment sources of eight bond issuances for $13,806 million, carried out between March 6, 2007 and March 17, 2014, although it also reviewed transactions dating back to the year 2000. The examination period spanned the transactions during the period of greatest financial difficulty for the Puerto Rican government, which was characterized by a government shutdown and an eventual downgrade of Puerto Rico's credit to speculative or junk level.

Bonds are an investment instrument, and whoever buys it (bondholder) lends their money in exchange for receiving payments with interest over a set term. Generally, governments, but also private companies, universities, and similar entities issue bonds to finance capital projects.

However, the government of Puerto Rico during the period under examination resorted to issuing debt to fund a large part of its operation without managing to identify effective methods for its repayment and considering overestimations in revenue, the report details.

“They (the government and the corporations) always had this idea that miraculously they were going to have the revenue (to pay), or at least that is what the Planning Board statistics show, but you see the economy falling and you still have positive revenue estimates,” said Valdivieso.

According to the audit, between March 9, 2000 and June 15, 2022, the government and its public corporations carried out 207 bond issuances for a total of $133,548 million in principal and interest. The figure, however, includes debt issuances that did not necessarily go to government entities. That is the case of the so-called Afica bonds, a conduit entity that hospitals, industries, and educational entities use to raise capital. In that case, some $1,539 million were issued, which are the responsibility of the private issuing entities. Also included are some $2,605 million issued by the Housing Financing Authority used to finance residential projects or mortgage loans.

Broadly speaking, the government and the public corporations borrowed money to cover the deficiency between revenue and expenses, which resulted in

“It was important that it be known that the debt was legal, but from a financial point of view it was not the most correct thing” YESMÍN VALDIVIESO COMPTROLLER OF PUERTO RICO

most of them operating at multimillion-dollar losses annually, according to the report.

The period in which the largest amount of government bonds was issued was between January 2009 and January 2014, which comprises the administration of former governor Luis Fortuño, of the New Progressive Party, when the Commonwealth and the public corporations issued over $36,255 million in debt, according to the report.

ON THE LINE

The OCPR's tests identified problems in the lack of revenue necessary for the payment of the debt when evaluating the repayment sources of the bond issuances, which included legislative appropriations, taxes, or own revenue.

From the examination of the last general obligation bond issuance, for $3,500 million (General Obligation Bonds of 2014 Series A), it was determined that the government came almost to the limit of the 15% borrowing margin established by the Constitution of Puerto Rico. In 2013, it was committed at 11.94% and rose to 14.77% in 2015.

Likewise, between 2000 and 2020, the bonds payable item increased by 398%, and the island's fiscal indebtedness index increased from 87% in 2000 to 114% in 2016, which implies that the government had more public debt than assets. The most critical point of the indebtedness index was in 2013, when it reached 173%.

When evaluating the bond issuances with legislative appropriations as the repayment source, it was found that the Debt Service Fund of Puerto Rico received only 28% of the $9,929 million required from 2000 to 2016. In addition, the General Fund had a deficit of some $10,665 million from 2002 to 2014, and from 2011 to 2020 it had no funds in the reserve that must be set aside for the payment of the public debt.

THE HIGHWAY DEBT

Meanwhile, between 2000 and 2013, the Highways and Transportation Authority (ACT) carried out 11 bond issuances for a total of $9,217 million, using taxes as the repayment source. The agency reported through 2021 an accumulated operating loss of $5,177 million.

In an examination of a bond issuance for $2,184 million, it was detected that, in 2007, the ACT obtained 83% of the revenue from taxes on gasoline, diesel, and petroleum as repayment sources. Meanwhile, from 2018 to 2021, it had no revenue for the repayment of $1,342 million and the indebtedness level increased to 97%.

Likewise, the audit also evaluated the bond issuances of the Ports Authority, the Electric Power Authority (AEE), and the Government Development Bank (BGF), whose repayment source was or is their own revenue.

The BGF accumulated operating losses of $6,659 million, after the issuance of principal or senior bonds for $1,796 million in 2011 and 2012. In addition, the indebtedness index increased between 108% and 430% for that period.

The liquidity of the BGF's assets depended largely on the capacity of the government and its public corporations to repay their debt, so the decrease and delay in payments by the governmental and private entities affected the bank's available balance.

Valdivieso attributed the BGF's liquidity problems to the lack of a reserve account that would allow it to stay afloat in the face of loan defaults. Alert to possible illegality in the use. According to the report, most of the bonds that were issued were supposed to be used to pay outstanding bonds, capital improvements, and other purposes. However, it is still not known exactly what the money from several bond issuances was used for.

“Everyone always focuses on the issuance of the debt and here the important thing is what” the money was used for, Valdivieso insisted, adding that they will publish a second report, but she did not specify the date.

The Comptroller mentioned that the office has seen that, in other cases such as the municipalities, money is allocated for capital improvements and this is used to cover operational funds, such as payroll, which is considered illegal.

“The reality is that right now we have the Fiscal Oversight Board (JSF), which is like a check so these things do not happen again, but the reality is that at some point we are going to be left without the (JSF) and we have to learn to manage our money,” Valdivieso stressed.

At a time when governor-elect Jenniffer González is making the appointments of her team, the Comptroller urged the official to choose a chief financial officer (CFO) who, in addition to being prepared, has “a great deal of commitment, not only to the governor, but to Puerto Rico.”